The most volatile week we’ve seen in years closed with a gain. For the week, the Dow rose 1.1%, the S&P gained 0.9%, and the Nasdaq added a solid 2.6%. Gold lost some of the gains it achieved recently, off 2.2%. A late-week surge sent oil higher on the week, up nearly 12% to $45.22 per barrel. The international Brent oil, used to make much of our gas here in the east, added $4 to $49.93 per barrel.
Source: Google Finance
The markets continued to lose ground as we opened the week, but reversed course sharply as the week went on and bargain hunters stepped in to snap up stocks. Like the past few weeks, there wasn’t one trigger we could point to as the cause of the swings in the market. A malaise had been building, leaving investors very uncertain about the direction of the market and creating a volatile trading environment.
We’ll start with Monday’s open, which was like walking right into a buzz saw. The Dow immediately opened down over 1,000 points, which was a loss of more than 6%. Panic selling at the open after last week’s losses was the likely culprit for such a big move (remember – never sell on panic, especially at the open!).
Thankfully, stocks moderated from there on Monday, with the Dow closing down a more modest 588 points. Any other day, that large of a move would be bemoaned. After falling more than 1,000 points, though, investors seemed content with a 588-point move lower.
Many investors have been looking for a pullback in stocks to begin putting new money in (count us among them), so the big move lower brought out the bargain hunters. This lead to a tug-of-war between the bears and the bulls (bears are investors who think the market will move lower and bulls believe it will move higher) for the remainder of the week.
While the volatility in the market was probably driven more by the battle between the bulls and the bears, there were a few news items that investors had their eyes on.
China continues to be a concern. Their markets opened the week with the worst one-day drop on record as anxieties about the weakness in their economy accelerate. The Chinese government responded by announcing several new stimulus measures designed to pump more money into the economy and boost spending. The stimulus currently in place had yet to produce any growth, but more of the same should do the trick, right?
This round of stimulus created a new worry as the government ordered pension plans to buy more stocks to boost prices. This will create a serious problem for pensioners if stocks were to fall further. It is a very irresponsible policy, but we live in very irresponsible times.
Also in the news was the Fed. This week they held their annual retreat in Jackson Hole, Wyoming. The turmoil in the market gave them plenty to discuss.
Only a few weeks ago, investors believed an increase in interest rates was likely to come in September. This had been a significant factor in the markets decline. However, Fed officials this week seemed to suggest a September rate hike was unlikely, which was a contributing factor to the markets increase.
Postponing the withdrawal of stimulus will help the markets in the near term, but this week shows just how volatile the market can be when rates do move higher.
Finally, this week offered a good opportunity to engage in some tax-loss harvesting. The sale of a stock triggers a tax on the profits. However, losses in your portfolio can offset these gains. Therefore, this was a good time to sell losing stocks to offset those gains. If it is a position you intend to keep for a long time, you can immediately buy back a similar – but not identical – position.
For example, one of the more popular positions in our portfolios is the Vanguard Total Stock Market Index fund. We can sell some of this fund and buy, say, the Schwab US Broad Market Index fund since it is a similar – but not identical – fund as they track slightly different indexes.
Tax-loss harvesting is something to remember when markets move lower.
Next Week
We’ll see some important economic reports next week, especially in light of the recent market volatility. One of the metrics the Fed is focused on is employment, making this week’s report on employment all that more important. We’ll also get reports on the strength of the manufacturing and service sectors.
These reports are important for their impact on the Fed’s stimulus. We may see the market move lower if these reports beat expectations, since it means we are a step closer to having the stimulus programs withdrawn.
Investment Strategy
We did some buying on the weakness in the market this week. One concern is that it seemed like everyone was also buying this week. Buy-to-sell ratios were at all-time highs. When too many investors get on one side of the trade, the market tends to do the opposite.
Another concern still surrounds the Fed and their stimulus program. We think the direction of the market hinges on their stimulus policy. Without a clear path forward, it is difficult to tell where the market will move in the short run.
Some of our longer-run fears were realized with the recent market action. The distortions created in the market by the Fed’s stimulus program will cause large downturns when the stimulus comes off.
Looking at longer term fundamentals, we are concerned over the lack of companies reinvesting their earnings into their business. Money has instead flowed into stock buybacks and dividends, not reinvested back in the company. This signals lower corporate growth down the road.
Bonds were a popular alternative this week as stocks fell, so bond prices rose and yields fell. However, that trend reversed when stocks found support. Prices are still on the high end of the range we have seen, which makes them an expensive hedge at this point. Cash may be a better option and we would avoid longer-term bonds.
Bonds to protect against inflation, or TIPs, remain a good long term hedge for inflation. Floating-rate bonds will do well if interest rates eventually do rise.
Some municipal bonds look attractive for the right client, too. We like buying individual, insured names for these bonds, avoiding muni index bonds if possible. They have not done well recently as a record supply has kept prices low. Therefore, we keep a longer term focus with these investments.
Gold is another good hedge for the portfolio. It is only a hedge at this point – rising on geopolitical issues and when more stimulus looks likely and falling on the opposite.
Finally, in international stocks, we see weakness around the globe and favor neither the developed or emerging markets. However, the stimulus programs in Europe and Japan do make for interesting investments, as long as the currency effects are hedged.
Please note, these day-to-day and week-to-week fluctuations have little impact on positions we intend to hold for several years or longer. Our short and medium term investments are the only positions affected by these daily and weekly fluctuations.
This commentary is for informational purposes and is not investment advice, an indicator of future performance, a solicitation, an offer to buy or sell, or a recommendation for any security. It should not be used as a primary basis for making investment decisions. Consider your own financial circumstances and goals carefully before investing. Past performance cannot guarantee results.
We’ll start with Monday’s open, which was like walking right into a buzz saw. The Dow immediately opened down over 1,000 points, which was a loss of more than 6%. Panic selling at the open after last week’s losses was the likely culprit for such a big move (remember – never sell on panic, especially at the open!).
Thankfully, stocks moderated from there on Monday, with the Dow closing down a more modest 588 points. Any other day, that large of a move would be bemoaned. After falling more than 1,000 points, though, investors seemed content with a 588-point move lower.
Many investors have been looking for a pullback in stocks to begin putting new money in (count us among them), so the big move lower brought out the bargain hunters. This lead to a tug-of-war between the bears and the bulls (bears are investors who think the market will move lower and bulls believe it will move higher) for the remainder of the week.
While the volatility in the market was probably driven more by the battle between the bulls and the bears, there were a few news items that investors had their eyes on.
China continues to be a concern. Their markets opened the week with the worst one-day drop on record as anxieties about the weakness in their economy accelerate. The Chinese government responded by announcing several new stimulus measures designed to pump more money into the economy and boost spending. The stimulus currently in place had yet to produce any growth, but more of the same should do the trick, right?
This round of stimulus created a new worry as the government ordered pension plans to buy more stocks to boost prices. This will create a serious problem for pensioners if stocks were to fall further. It is a very irresponsible policy, but we live in very irresponsible times.
Also in the news was the Fed. This week they held their annual retreat in Jackson Hole, Wyoming. The turmoil in the market gave them plenty to discuss.
Only a few weeks ago, investors believed an increase in interest rates was likely to come in September. This had been a significant factor in the markets decline. However, Fed officials this week seemed to suggest a September rate hike was unlikely, which was a contributing factor to the markets increase.
Postponing the withdrawal of stimulus will help the markets in the near term, but this week shows just how volatile the market can be when rates do move higher.
Finally, this week offered a good opportunity to engage in some tax-loss harvesting. The sale of a stock triggers a tax on the profits. However, losses in your portfolio can offset these gains. Therefore, this was a good time to sell losing stocks to offset those gains. If it is a position you intend to keep for a long time, you can immediately buy back a similar – but not identical – position.
For example, one of the more popular positions in our portfolios is the Vanguard Total Stock Market Index fund. We can sell some of this fund and buy, say, the Schwab US Broad Market Index fund since it is a similar – but not identical – fund as they track slightly different indexes.
Tax-loss harvesting is something to remember when markets move lower.
Next Week
We’ll see some important economic reports next week, especially in light of the recent market volatility. One of the metrics the Fed is focused on is employment, making this week’s report on employment all that more important. We’ll also get reports on the strength of the manufacturing and service sectors.
These reports are important for their impact on the Fed’s stimulus. We may see the market move lower if these reports beat expectations, since it means we are a step closer to having the stimulus programs withdrawn.
Investment Strategy
We did some buying on the weakness in the market this week. One concern is that it seemed like everyone was also buying this week. Buy-to-sell ratios were at all-time highs. When too many investors get on one side of the trade, the market tends to do the opposite.
Another concern still surrounds the Fed and their stimulus program. We think the direction of the market hinges on their stimulus policy. Without a clear path forward, it is difficult to tell where the market will move in the short run.
Some of our longer-run fears were realized with the recent market action. The distortions created in the market by the Fed’s stimulus program will cause large downturns when the stimulus comes off.
Looking at longer term fundamentals, we are concerned over the lack of companies reinvesting their earnings into their business. Money has instead flowed into stock buybacks and dividends, not reinvested back in the company. This signals lower corporate growth down the road.
Bonds were a popular alternative this week as stocks fell, so bond prices rose and yields fell. However, that trend reversed when stocks found support. Prices are still on the high end of the range we have seen, which makes them an expensive hedge at this point. Cash may be a better option and we would avoid longer-term bonds.
Bonds to protect against inflation, or TIPs, remain a good long term hedge for inflation. Floating-rate bonds will do well if interest rates eventually do rise.
Some municipal bonds look attractive for the right client, too. We like buying individual, insured names for these bonds, avoiding muni index bonds if possible. They have not done well recently as a record supply has kept prices low. Therefore, we keep a longer term focus with these investments.
Gold is another good hedge for the portfolio. It is only a hedge at this point – rising on geopolitical issues and when more stimulus looks likely and falling on the opposite.
Finally, in international stocks, we see weakness around the globe and favor neither the developed or emerging markets. However, the stimulus programs in Europe and Japan do make for interesting investments, as long as the currency effects are hedged.
Please note, these day-to-day and week-to-week fluctuations have little impact on positions we intend to hold for several years or longer. Our short and medium term investments are the only positions affected by these daily and weekly fluctuations.
This commentary is for informational purposes and is not investment advice, an indicator of future performance, a solicitation, an offer to buy or sell, or a recommendation for any security. It should not be used as a primary basis for making investment decisions. Consider your own financial circumstances and goals carefully before investing. Past performance cannot guarantee results.
